Dollarama Inc. Surged ~60% Over the Past Year: Time to Take Profits?

Dollarama Inc. (TSX:DOL) is an incredible business that keeps delivering. The company rocketed ~60% over the past year and is now up a whopping ~400% over the last five years. Although there’s still ample room for growth, the price of admission may be way too high for the average value-conscious investor at current levels. Dollarama is your typical Warren Buffett stock. It’s a simple, easy-to-understand business with a relatively simple business model and, unlike other physical retailers, Dollarama is relatively insulated from the disturbance caused by the rise of e-commerce — a disturbing trend that has caused Buffett to…

To keep reading, enter your email address or login below.

Register by giving us your email below to continue reading all of the content on the site. Also receive a free Email Newsletter from the Motley Fool. (You may unsubscribe any time.)

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls.
I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.

Dollarama Inc.(TSX:DOL) is an incredible business that keeps delivering. The company rocketed ~60% over the past year and is now up a whopping ~400% over the last five years. Although there’s still ample room for growth, the price of admission may be way too high for the average value-conscious investor at current levels.

Dollarama is your typical Warren Buffett stock. It’s a simple, easy-to-understand business with a relatively simple business model and, unlike other physical retailers, Dollarama is relatively insulated from the disturbance caused by the rise of e-commerce — a disturbing trend that has caused Buffett to sell shares in a one of his long-time holdings, Wal-Mart Stores Inc.

For digital retailers, it wouldn’t make a lot of sense to ship knickknacks valued at a buck or two, since the shipping costs would likely be higher than the amount a typical customer spends. Despite not investing in an e-commerce platform, Dollarama has been firing on all cylinders, outperforming many of its peers south of the border. The company has enjoyed year-over-year same-store sales growth to go with improved operating margins, all while the company is growing its store count. With the dollar store industry incredibly fragmented, there’s still enough growth to last at least another decade.

In addition to having one of the most promising growth profiles out there, Dollarama is a solid defensive name that would likely hold its own during the next economic downturn. The bull has roared this year, but next year may be another story, and Dollarama is a great stock to own when times get tough, since consumers are likely to penny pinch and head to Dollarama to get the best bang for their buck.

Bottom line

A defensive holding with an explosive growth profile sounds like a long-term core holding, but investors should realize that they’re paying a huge premium after the stock’s recent breakout.

The stock currently trades at a 38.9 price-to-earnings multiple, a six price-to-sales multiple, and a 32.8 price-to-cash flow multiple, all of which are substantially higher than the company’s five-year historical average multiples of 27, 3.4, and 24.9, respectively. The dividend yield has also fallen to a mere 0.27% — almost half of what it is normally.

The stock is worthy of a premium multiple, but 32.8 times earnings is a bit ridiculous. I think the stock is extremely overvalued and could be at risk of a correction should the company report sub-par numbers in one of its upcoming earnings reports. Everyone is overly bullish on the company, and there are going to be sky-high expectations. The bar has been set high; if the company falls shy of expectations, I believe the stock could fall back down to reasonable valuations.

Dollarama is a great business, but at this point, it looks like the gravy train has already left the station, so I’d back away from the stock until a meaningful pullback presents itself. Current shareholders may wish to take some profits off the table because I think the stock has run a bit ahead of itself.

The Motley Fool Canada's top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium "buy report" on a dividend giant he thinks everyone should own. Not only that - but he's created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up - and how you can avoid them.

For this limited time only, we're not only taking 57% off Dividend Investor Canada, but we're offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.

While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.

Fool contributor Joey Frenette has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.